Statement of Commissioner Kristin N. Johnson Regarding Effectively Calibrating CFTC Civil Money Penalties to Deter Repeated Compliance Failures
August 29, 2023
Today the Commodity Futures Trading Commission (the Commission or CFTC) announced and resolved charges against Goldman Sachs & Co. LLC (Goldman) for (i) failing to create and keep audio recordings related to its business as a swap dealer, as required under the Commodity Exchange Act (CEA) and existing CFTC regulations, and (ii) thus, violating a 2019 Commission cease-and-desist order for the same failure under the same statutory and regulatory provisions.
The CFTC Division of Enforcement (DOE) advances the Commission’s purpose to ensure market participants’ compliance with existing statutory and regulatory obligations. The exceptional efforts of the CFTC DOE in this matter reinforce this longstanding commitment.
It is concerning, however, that all too often the Commission finds that a few central market participants (firms that strongly influence industry best practices) repeatedly violate well-established legal requirements. These concerns become particularly acute when coupled with a market participant’s failure to self-report known violations.
The recordkeeping requirements for swap dealers at the center of this resolution are not newly adopted, nor were they recently implemented. The Commission adopted these internal business conduct standards more than a decade ago, and compounding implementation or compliance violations should be met with compounding penalties.
History with Audio Recordkeeping Failures
Since March 2020 (and perhaps even earlier), two of Goldman’s audio recording systems provided by third-party vendors failed to record calls made using company-issued mobile devices as well as a computer software-based soft turret system. Flaws in the third-party systems resulted in the loss of thousands of calls concerning Goldman’s swap dealer business, communications that the CEA and CFTC regulations require Goldman and other swap dealers to record and maintain. The non-compliance continued for at least seven months before it was satisfactorily resolved, and Goldman did not self-report. In resolution of this matter, the Commission today imposes a civil monetary penalty of $5,500,000.
This is not the first time the Commission has resolved claims related to a failure to maintain audio recordings with this firm. As noted above, in 2012, the Commission adopted the swap dealer recordkeeping requirements. Several years later, Goldman was unable to produce to the CFTC DOE, in the course of an unrelated investigation into Goldman’s conduct, audio recordings from dates in 2014.
A malfunction during a system upgrade related to a third-party vendor service may have led to the errors that prevented effective recording and maintenance of trading information for twenty calendar days. Goldman had learned of the failure of its audio recording systems well prior to the DOE’s investigative requests but had not self-reported its non-compliance to the CFTC.
In November 2019, the CFTC ordered Goldman to pay $1 million for the audio recordkeeping failures and to cease and desist from violating the swap dealer recordkeeping requirements. A mere four months after the 2019 Commission action was resolved, Goldman once again found itself in violation of the same audio recordkeeping requirements.
The Purpose of Recordkeeping Requirements
Goldman is an established player in the derivatives market and has engaged in derivatives activities of significant size and importance for decades. In addition to its swap dealer registration, Goldman registered with the Commission in 1979 as a futures commission merchant and subsequently as a commodity trading advisor and commodity pool operator. Goldman is no stranger to operating in a highly regulated derivatives market.
The recordkeeping requirements at issue, specifically relating to daily trading records, serve a critical purpose by ensuring that pre-execution trade information that leads to the execution of a swap is available to the Commission and relevant self-regulatory organizations to conduct a comprehensive and accurate trade reconstruction for the swap and assess whether a swap dealer is complying with the CFTC’s swap dealer requirements, including those designed to protect customers. These missing records materially impede the Commission’s ability to effectively execute its mission to monitor swap dealers, protect swap customers, and preserve the integrity of the swaps market in connection with communications leading up to the execution of swaps. The Commission is deprived of a critical regulatory tool to identify the existence, nature, and extent of any wrongdoing that might have occurred during Goldman’s pre-execution communications with customers regarding the execution of swaps during the relevant time.
The Goals of General and Specific Deterrence
When we find that—notwithstanding fines or penalties—market participants repeatedly engage in material violations of the same Commission regulations based on the same or substantially similar behavior, we must examine the effectiveness of our resolution methodology. Civil monetary penalties are one of the most important levers employed by the Commission to enforce the CEA and CFTC regulations in accordance with the Commission’s mission.
These penalties serve the purpose of general and specific deterrence, in other words they serve to put the market and the specific registrant on notice that the Commission intends to enforce the CEA and CFTC regulations vigorously and punish violators substantially. The Commission’s penalties must be rightly calibrated to deter repeat offenders and to prevent anyone from perceiving penalties as the cost of doing business.
The resolution announced today—a $5.5 million penalty—represents less than one half of one percent of the net income that The Goldman Sachs Group, Inc., of which Goldman is a material subsidiary, reported solely for the second quarter of 2023. Put differently, the civil monetary penalty imposed today is quite literally less than the profit Goldman can earn by the end of the day today.
While I acknowledge that challenges related to contracting with third-party vendors are at the center of this resolution, it is incumbent upon our registrants—particularly in light of the increasing dependence on critical third-and fourth-party service providers for technology and cyber resilience related services—to take steps to remain prepared and ensure compliance. In light of the increasing reliance across business lines on technological platforms, products, and services, our registrants must maintain well-developed continuity plans to ensure that there are no gaps in their compliance with CFTC regulations and that they are prepared to use alternative means of compliance, particularly in the event of third- or fourth-party service providers’ failures.
Dependence on Third- and Fourth-Party Service Providers Is Not a Defense
In times of market-wide distress, the Commission grants appropriate relief. In such moments, market participants must be prepared to deploy alternative means of compliance as set out in the staff’s industry-wide no-action relief.
Reliance on third- and fourth-party service providers is not a defense for regulatory violations and offers no absolution for repeat failures to comply with statutory and regulatory obligations, including those that are fundamental to the effective execution of the Commission’s mission.
I want to commend the formidable work of Division of Enforcement staff members Devin Cain, Alejandra de Urioste, R. Stephen Painter, Jr., David MacGregor, Lenel Hickson, Jr., and Manal M. Sultan in pursuing this important case.
 7 U.S.C. § 6s(f)(1)(C), 17 C.F.R. §§ 1.31(b)(2), 23.202(a)(1), (b)(1).
 CFTC Orders Goldman Sachs to Pay $1 Million for Recordkeeping Violations, Nov. 26, 2019, https://www.cftc.gov/PressRoom/PressReleases/8086-19.
 See, e.g., Statement of Commissioner Kristin N. Johnson Regarding CFTC Orders Against HSBC for Fraudulent and Manipulative Swaps Trading and Spoofing, and for Recordkeeping and Supervision Failures, May 12, 2023, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement051223 (calling for increased penalties in offline communications cases).
 Goldman Sachs Reports 2023 Second Quarter Earnings Per Common Share of $3.08 and Annualized Return on Common Equity of 4.0%, July 19, 2023 (announcing $1.22 billion in net income for the second quarter of 2023), https://www.goldmansachs.com/media-relations/press-releases/2023/2023-07-19-q2-results.html.
 For example, following the onset of the COVID-19 (coronavirus) pandemic, the Division of Swap Dealer and Intermediary Oversight (DSIO) (currently known as the Market Participants Division) granted time-limited, conditional no-action relief for failure to comply with the requirements to record oral communications, provided a written record regarding the content of the oral communication was created and maintained and the registrant took affirmative steps to collect the written record, “including, without limitation, handwritten notes or other contemporaneous or subsequently created transcripts or summaries.” Letter No. 20-06 (Mar. 17, 2020) (granting temporary relief), which was extended by CFTC Letters No. 20-19 (June 9, 2020) and No. 20-26 (Sept. 11, 2020). The relief expired on January 15, 2021.